25 June 2012 | By Catrin Griffiths
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The entrants for The Lawyer Award’s Banking and Finance Team of the Year stand out for their creativity during the crunch
How well do you deal with crisis? A feature of this year’s shortlist for The Lawyer Awards Banking and Finance Team of the Year was the way in which the legal teams handled sudden and potentially catastrophic volatility, whether in the high-yield or IPO markets, within regulatory uncertainty or a sudden and unexpected collapse of a global company. When this happens, law firms need to race against the clock but also come up with extraordinarily creative solutions. Read on for how finance lawyers really earn their keep.
Allen & Overy
The theme for Allen & Overy (A&O) in 2011-12 was marrying its bank and bond practice. One key deal showcased the firm’s leveraged buyout (LBO) and high-yield teams: Refresco and Dematic. Indeed, Refresco could be a poster child for a downturn deal, with a history involving an Icelandic consortium and a new structure that made substantial use of the now-powerful high-yield market.
Dutch soft drinks- maker Refresco signed its main debt facility in 2008 when it agreed to €523m (£421.7m) of senior, second lien and PIK loans that refinanced a 2006 buyout. The 2011 deal involved €660m and a €75m super senior revolving credit facility and created a more unified debt structure. Banking partners Jonathan Brownson, Jeanette Cruz and high-yield partner Kevin Muzilla, formerly of Milbank’s London office, who moved over to A&O in 2009 - advised the company and the financial sponsor 3i on importing streaming mechanisms that had been used in LBOs but never on a high-yield deal, maximising credit support.
The cross-border issues were tricky; financial assistance rules in half a dozen of the key jurisdictions militated against the granting of security, which would damage the level of credit support. So finding a structural answer would have a direct effect on the pricing of the deal.
The A&O team imported a streaming technique into the debt hierarchy that allowed the high-yield notes to be structured into separate streams of proceeds, a mechanism that had never been used in a high-yield deal.
It was a good year for the A&O bank bond team. The Dematic deal, which involved $300m senior secured notes, a euro super senior revolving credit facility and €60m super senior guarantee facility, and which adapted mechanisms previously seen only in bank/bond structures in the super senior intercreditor agreement, resulted in A&O’s investment in a serious high-yield facility paying off all round for its finance team.
Berwin Leighton Paisner
The hangover from the boom is still continuing - and it’s still exercising finance lawyers’ grey cells. The saga of RBS’s slow return back to health will be the subject of many a doctoral thesis, and many law firms will have been involved in its recovery.
In late 2011 it was the turn of Berwin Leighton Paisner (BLP), whose real estate finance team worked on a deal that the Financial Times described as a “watershed” for the recovery of RBS and one of the most complex loan sales in the history of the property sector. Project Isobel was dubbed the highest-profile real estate portfolio deal since the beginning of the financial crisis. Beginning life as Project Monaco, which was an attempt to sell a £2.6bn portfolio, it had several hurdles before emerging as a portfolio sale worth £1.36bn.
BLP, led by Paul Severs and including finance partners Emma Howdle-Fuller, Trevor Wood and Tom Church, worked on the complex structure. The lawyers had to come up with a UK-domiciled structure that allowed RBS plenty of flexibility and would be attractive to global investors, while hedging and governance issues abounded.
The majority of the package of distressed leveraged real estate loans - now at some 70 per cent of their original value - had been written in 2007, and the portfolio was sold to a UK fund vehicle managed by Blackstone in which RBS has a majority stake. The structure will permit RBS to keep a share of future profits from the fund while avoiding upfront losses from selling the loans at a discount, and was backed by £550m in senior debt provided by RBS.
While the high-yield bond market has been the saviour of finance teams, when it stutters the effects can be near-catastrophic. A Clifford Chance team, led by partner Charles Cochrane, senior partner Malcolm Sweeting and leveraged finance director Lorraine Vaz, was in the middle of a deal advising the mandated lead arrangers Morgan Stanley, Bank of America, Merrill Lynch, Goldman Sachs, HSBC, Nomura and Nordea on the €2.3bn acquisition of Securitas Direct by Hellmann & Friedman, and Bain Capital from EQT Partners. The acquisition followed hard on the heels of a highly competitive auction - and then, in the second half of 2011, the high-yield market froze, creating an enormous headache for all the participants. The financing structure, which included a super senior revolving credit facility, a senior secured bridge loan to be refinanced by a senior secured high- yield bond and an unsecured bridge loan to be refinanced with an unsecured high-yield bond, looked as if it was in serious jeopardy.
However, the Clifford Chance team came up with a new hybrid mezzanine facility that ended up being the biggest mezzanine loan in Europe during 2011. The structure moved away from a US unsecured bond package with limited creditor protection to a classic European mezzanine facility with enhanced creditor protection - something that necessitated careful drafting on the intercreditor agreement, which had to be flexible to meet all circumstances. In February this year the bridge was successfully refinanced.
Private equity finance lawyers are used to dealing with a variety of different asset classes. But Duke Street’s acquisition of Parabis, backed by Lloyds TSB, was something else; it represented the first major private equity investment in a law firm since the Legal Services Act (LSA). There were no precedents, except perhaps GVA Grimley’s sale of a minority stake to Lloyds Development Capital back in 2007. Hogan Lovells partner Stuart Brinkworth, when he was at SJ Berwin, advised Ares Capital, Lloyds TSB, RBS and Santander on the financing of that deal. Armed with pretty much the only relevant precedent, Brinkworth was the obvious finance lawyer for Lloyds TSB to turn to on this groundbreaking deal.
Parabis is the parent company of two volume insurance law firms, Cogent Law and Plexus Law. While the firms had a substantial track record, the lenders had no established credit policy for an LBO financing in the highly regulated legal sector, which meant that the participants had to cope with myriad issues that evolved as the deal went on. Furthermore, it was crucial to get regulatory aspects right in a post-Halliwells environment, meaning that the lawyers had to explore the different regulatory approaches by the FSA and SRA.
The Hogan Lovells team negotiated an intra-group reorganisation of Parabis, created a detailed analysis of enforcement options (not easy in such uncharted waters) and came up with an intercreditor position that leant on technology from the high-yield market; a second lien product unusual for a mid-market LBO. The firm’s contribution to the successful outcome of this unprecedentedly complex deal will shape the development of the legal sector in the post-LSA landscape.
Ropes & Gray
When senior bank lending is at a low, other sources of finance step in. The upshot? A very different dynamic with which lawyers have to get to grips. Asset managers and hedge funds have become increasingly powerful, while the mezzanine market has become hugely important. This was exemplified perfectly in the deal involving oil-drilling company KCA Deutag, which had to deal with the problems following its failure to raise a $500m high-yield bond in August 2011.
Ropes & Gray’s finance team, led by London co-managing partners Maurice Allen and Mike Goetz, acted on the restructuring, which became one of the standout mezzanine deals in the market in 2011. They advised all the mezzanine lenders, which included funds managed by BlackRock, EIG and GoldenTree Asset Management, and which led the financings. The key issue was the exercise of the mezzanine’s existing rights as lenders to get a majority equity state in return for the investment of new capital. The restructuring eventually ended in the cancellation of the group’s $585.9m mezzanine facilities and an equity injection of $550m.
Slaughter and May
The volatility of the IPO market has been a feature of the past 18 months. When ISS, a Danish facilities company announced plans in February 2011 to raise the equivalent of $2.4bn on the Copenhagen stock exchange, it was the fifth largest IPO announced in 2011. Along with the IPO, ISS called on Slaughter and May partners Matthew Tobin and Robert Byk to advise on a $2.2bn facility to refinance existing senior facilities.
In March 2011, the situation suddenly changed. Despite the fact that the IPO was oversubscribed, the sheer volatility of the equities market meant that ISS had to postpone its offering. Inevitably enough, this had a knock-on effect on the refinancing strategy.
Rather than a full refinancing, ISS opted to amend and extend its existing facilities. The company then extended specific tranches of its original agreement using a novel hollow tranche structure as an alternative to the usual ’amend and extend’ model. It avoided the technical requirement to get all lenders to consent to the amendments in order to validate the extension of the relevant tranches. The logistics were considerable: Slaughter and May had to co-ordinate with law firms across Australia, Belgium, Denmark, Finland, France, Germany, the Netherlands, Norway, Spain, Sweden, Turkey and the US. By June 2011 lender consent was established.
Weil Gotshal & Manges
When the MF Global (MFG) group collapsed in October 2011, it affected some 38,000 customers and 3 million positions. With £100bn of notional value, it is said by many to be the eighth biggest failure in US corporate history. MFG UK represented a quarter of the global group’s business and was the biggest European collapse since Lehman Brothers. Enter Weil Gotshal & Manges London managing partner Mike Francies. He and his team - including insolvency partner Adam Plainer - brought in KPMG to advise.
While the initial plan was to sell MFG’s US parent, it quickly became apparent that this was not possible, which meant that after the holding company filed for bankruptcy protection, the board of the UK arm had to apply to the High Court for the appointment of KPMG as special administrators. It was the first-ever filing under the new Special Administration Rules, a streamlined process in the wake of the Lehman insolvency that aims to support creditors and increase the chance of returning client money and remaining assets when a company is being wound up.
The situation was exacerbated by the fact that 100 international exchanges were closing out their positions with MF Global, requiring round-the-clock negotiations - the Weil team having to liaise with a wide range of customers. The complex web of interrelationships meant that the lawyers had to categorise various claims being made against MFG; negotiations took place to ensure the efficient return of monies into MFG from investment banks holding both segregated client cash and MFG’s own account cash.
There was a happy ending - as much as there can be in such a highly charged situation. At a creditors’ meeting on 9 January this year, just 20 weeks after the collapse, the proposals of the special administrators were approved, and there followed an informal court hearing before Mr Justice Richards on 3 February. The interim dividend payment was 26 per cent. MFG UK has become a superb vindication of the new streamlined process brought in by the Special Administration Regulations. Truly, the restructuring mandate of 2011.
Shortlisted entries for this year’s Banking and Finance Team of the Year at The Lawyer Awards centred on crisis issues, with volatility at the core of the problems for which lawyers have been finding solutions.